Subprime crisis is eroding the Dream

As we spend this month celebrating the achievements of African-Americans, I'm saddened by a report that concludes that the subprime mortgage crisis has caused the largest loss of wealth in modern US history for black and Latino homeowners.

The erosion of wealth is staggering.

Subprime borrowers of color will lose between $164 billion and $213 billion for loans taken during the past eight years, according to United for a Fair Economy, a nonprofit, nonpartisan organization. For the past five years the group has examined the racial wealth divide in this country.

UFE is the latest organization to try to put a dollar figure on the loss of wealth as a result of the proliferation of subprime loans. And while some might want to dismiss the group's findings as alarmist, one fact is clear: Minorities have been hit hardest.

Black borrowers will lose between $72 billion and $93 billion, while Latino borrowers will lose between $76 billion and $98 billion, UFE reports.

"The dream of economic stability and opportunity for everyone living in the US, so eloquently described by Martin Luther King Jr., is bound up with homeownership, the most significant source of wealth for most people," said Dedrick Muhammad, a coauthor of the UFE report.

Of late, much has been made of the buying power of blacks. A study by the University of Georgia's Selig Center for Economic Growth put black spending at about $845 billion last year. And that spending is projected to top $1.1 trillion by 2012 - a 34 percent increase over five years.

But it's not enough to consider what people will spend. Wealth is created by what you keep and invest or save. It's also created when people own appreciable assets, such as a home.

"As income comes and goes like a flowing river, wealth - what you own minus what you owe - is a reservoir to handle hard economic times, make large purchases, help secure the future of new generations, and protect individuals and families as they age," the report's authors write.

Nearly 60 percent of the total wealth held by middle-class families exists in their home equity. Although home values are declining, owning a home is still the biggest wealth equalizer.

While the housing crisis has hurt many regardless of race or income, it has disproportionately affected minorities. That's because people of color are more than three times as likely to have subprime loans, the UFE found: High-cost subprime loans account for 55 percent of loans to blacks, but only 17 percent of loans to whites.

And before any of you fix your lips to place all the blame on the homeowners, just remember this loss of wealth came largely as a result of lenders and others in the mortgage industry who took advantage of people trying to achieve the American dream of homeownership.

I've seen some loan documents with crazy-high prepayment penalties that people didn't even realize they had. I've interviewed and counseled hardworking folks who - yes, foolishly - were so focused on getting a home that they believed whatever they were told, including that the value of their homes would continue to rise, making it easy for them to refinance out of the exotic mortgages with tricky teaser rates.

"On the surface, subprime loan products can sound relatively simple and attractive, and some people have benefited from their use," the report's authors write. "Yet, as more details of the industry's activities began to surface, the predatory practices of many subprime loan brokers came to the forefront. Unless inexperienced borrowers asked complex questions about loan terms covered only in the fine print, they received loans that they had little to no chance of repaying."

UFE is right in concluding that one of the biggest challenges facing our nation is not the lack of wealth but the "destructive distribution of wealth."

When King delivered his historic "I Have A Dream" speech in 1963, he said this about the economic state of blacks: "The Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity."

King had a dream that the great economic divide in this country would shrink significantly. But sadly that dream is still being deferred - made worse most recently by the subprime crisis.